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Boom or Bust? Indices Review for Short-Term and Long-Term Potential

Everyone has been excited that the DOW came back to 14,000 and we remain close to that number still. What does that mean for the individual investor? What should you be evaluating for the near term and the longer term? Regardless of your trade style, you should always keep an eye on some of the larger charts for the longer term point of view. In this week’s outlook, we’ll take a quick look at the DJIA and the S&P 500.

DJIA and S&P 500 Comparisons and Potential

Daily Charts

This week I want to show you a side-by-side comparison of these two indices. We will start with the Daily chart and evaluate short-term potential.
When looking at these daily charts, you will see quite a few similarities. After bullish runs, they have both lost a bit of momentum and have found themselves somewhat range bound. Watch these areas for potential breaks. Right now the key may very well be on the next bullish play. If prices can’t come up to challenge and potentially break the resistance levels here (around 14,050 DJIA and the 1,530 S&P) then it would be very easy to see additional sideways action or even selling off to form a descending channel. Anything traded near term should be watched very carefully. When combined with some of our longer term charts, I tend to want to take a bearish perspective on these, but you may wish to wait until we get the price point action that we need to jump on board.

Weekly Charts

When looking at the Weekly charts for both of these, you’ll again see the bullish overall trend.

I have highlighted the three bullish cycles in the overall bullish push that we’ve seen since 2011. Typically speaking, after three bullish cycles the trend has a tendency to shift and cause potential reversal. This would again signify a longer term potential for failure. Keeping in mind that we haven’t seen the failures yet, I want you to be aware of their potential.

Monthly Charts

Moving on to the Monthly Charts, you will again see the evidenced bullish trend of the last few years. Remember that this chart will give you a larger picture perspective and an opportunity to look at what may become trading guidelines for the next number of months and maybe even years.

I have highlighted a couple of things that I want you to watch for over the next number of weeks and months. One of these is the potential for double top action. The potential for this seems a little bit cleaner on the DJIA as we have pushed closer to the prior top here than we have on the S&P side of things. A double top completion would mean bearish activity and obviously an influx of selling participation.
When you look at the potential for a double top here, that alone is bearish, but when you combine that with a potential rising wedge pattern on both of these Monthly charts you are looking at some real potential for failure.

When looking at all of these charts, it seems to me that the patterns across time seem to be stacking up in a bearish nature. As I mentioned before, we do not yet have the price point action showing us the failure. Evaluating the short side here is precautionary and may give you the opportunity for a pre-emptive strike.

If you hold a large number of equities in your portfolios, you may want to consider adding some options plays to the mix to potentially protect a bit of that value should we run into a bear market. For others, you may just use options to take advantage outright of a bearish move on these indices. There are fixed risk plays using options that you can use to take advantage of market failure without having to short stocks outright.
For those of you, who may never have paid attention to how to take advantage of the indices, keep in mind that there are many vehicles by which to do this. We focus on utilizing Options on the Indices Futures in order to lessen capital outlay and we use fixed risk strategies that allow you to rest at night knowing exactly where you stand. You should be prepared for the appropriate actions should these markets start to shift. We are here to make your options clear!

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